Thursday, August 21, 2014

Post Keynesian Labour Market Theory: A Summary

The Post Keynesian view on labour markets is opposed to that of neoclassical economics. A summary of Post Keynesian labour market theory from Lavoie (1992) follows.

Post Keynesian economics holds that labour markets are not necessarily well behaved, that the wage rate is not an ordinary “price”, and that wages cuts can have perverse effects on economic activity contrary to neoclassical theory (Lavoie 1992: 217).

Wages are not, general speaking, set by reference to marginal product of labour, but wage rate determination is affected by notions of fairness, justice and social norms, and these factors can affect all attributes of labour from the real/nominal wage to productivity, working week, job safety, security and so on (Lavoie 1992: 218).

At the aggregate level, there is no necessary and consistent relationship between the real wage and demand for labour (Lavoie 1992: 217).

Even the neoclassical view that work necessarily carries disutility is untrue: work per se can be rewarding and bring satisfaction (Lavoie 1992: 218).

Lavoie (1992: 218) points to the dual labour market hypothesis, which is that most advanced economies have two sub-labour markets, as follows:

(1) the “core” economy labour market
Here wages and productivity are high, costs of labour training are high, and there is a greater degree of unionisation.

The administered pricing/mark-up pricing sector of an economy strongly corresponds to the “core” economy, though imperfectly.

A strong general characteristic of most households is that they wish to maintain their standard of living, and that they face fixed nominal contractual obligations like debt, and hence the need to maintain income levels (Lavoie 1992: 222). This, though amongst other reasons too, translates into a strong opposition to nominal wage cuts.

Even labour supply often depends on a perceived target wage rate and past standards of living (Lavoie 1992: 222–223), not necessarily on movements of the real wage rate.

The demand for labour is mostly driven by demand for output, and hence aggregate demand drives employment levels.